Morningstar DBRS Confirms Ryder System, Inc.’s Long-Term Issuer Rating at A (low); Trend Remains Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Ryder System, Inc. (Ryder or the Company) and its related entity, Ryder Truck Rental Canada LTD., including its Long-Term Issuer Rating at A (low). The trend for all credit ratings is Stable. The Company’s Intrinsic Assessment (IA) is A (low), while its Support Assessment is SA3, resulting in Ryder’s final credit ratings being equal with its IA. The credit rating of Ryder Truck Rental Canada LTD.’s Guaranteed Short-Term Promissory Notes benefit from a guarantee from Ryder, and as a result, is equalized to the R-1 (low) Short-Term Issuer Rating of the Company.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings consider Ryder’s significant commercial fleet management franchise, underpinned by three soundly run businesses, including Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). Overall, earnings generation is solid and supportive of the credit ratings despite lower reported earnings in 2023. The Company’s risk profile is sound, reflecting well-managed credit and operational risk positions, as well as somewhat heightened asset risk due to declining used truck and tractor values. However, asset risk is mitigated by Ryder’s conservative estimated residual values which are near historical lows. Further, credit ratings are supported by the Company’s mostly unsecured funding profile, its significant level of unencumbered assets, and its moderate balance sheet leverage.

The Stable trend considers our view that the Company’s credit fundamentals will remain sound over the medium term, despite the slowing freight environment and declining used vehicle values.

CREDIT RATING DRIVERS
A sustained material improvement in earnings, including larger contributions from the Company’s SCS and DTS business segments, while maintaining similar balance sheet fundamentals, would result in an upgrade of the credit ratings. Conversely, a sustained decline in earnings generation, a weakening franchise reflecting notable customer attrition or a prolonged significant increase in balance sheet leverage, would result in a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Strong / Good
Ryder maintains a deeply rooted commercial fleet management franchise in North America. The Company’s three business segments provide a broad range of services. The FMS segment offers corporate customers full-service leasing, short-term commercial rental, and fleet maintenance programs. The SCS segment provides a number of logistics management services that are designed to improve a customer’s supply chain efficiencies of operations and productivity. The DTS segment provides customers solutions to their fleet needs, including equipment, drivers, fleet sizing, scheduling, and regulatory compliance. Finally, Ryder’s management team is highly seasoned and holds considerable industry and institutional knowledge.

Earnings Building Block (BB) Assessment: Good
Ryder generates a solid level of earnings. With used truck values normalizing from their post-pandemic unsustainable levels, the Company’s earnings were down 53% to $406 million in 2023 from $867 million in the prior year, driven by a 56% year-on-year (YoY) decrease in net gains on used vehicle sales. Earnings were also impacted by a onetime, non-cash charge of $188 million related to currency translation adjustment losses related to Ryder’s exit from the U.K. markets, and a softer freight environment which pressured commercial rental revenues. Meanwhile, the Company’s SG&A expenses were stable at $1.4 billion, YoY, reflecting sound cost management.

Ryder’s earnings are supported by the three business segments that each generate solid earnings before taxes (EBT) although the FMS segment anchors the earnings. Indeed, the FMS segment accounted for 65% of Ryder’s total EBT (excluding eliminations), followed by SCS at 23%, and DTS at 12%. Over time, as Ryder invests in both SCS and DTS, Morningstar DBRS expects EBT to become less weighted to FMS.

Risk Building Block (BB) Assessment: Good
Overall, Ryder maintains a sound risk profile. Operational risk is a key risk, given the Company’s significant scale of operations. Overall, Morningstar DBRS views this risk as well-managed, as the Company has not reported a significant operational issue over the last few years. Meanwhile, asset risk is somewhat elevated, given declining used truck and tractor values, but moderated by Ryder’s conservative vehicle portfolio residual value estimates. Credit risk is sound, with write-offs totaling a modest 1.2% of average gross receivables in 2023, down from 1.5% in 2022. In regards to client concentrations, Morningstar DBRS views positively, the declining client concentration (by revenue) within the SCS businesses. Specifically, within the SCS segment, the top 10 clients accounted for 40% of total segment revenue in 2023, down from 42% in 2022. Meanwhile, in the DTS segment, the top 10 clients accounted for 40% in 2023, stable with the prior year. Further mitigating concentration risk, clients within these business segments operate in a diverse set of industries and many are investment grade.

Funding and Liquidity Building Block (BB) Assessment: Good / Moderate
Funding is primarily unsecured debt that is diverse by source and well-aligned with the asset base. The Company’s assets are mostly unencumbered providing a significant level of financial flexibility. Ryder’s liquidity position is suitable and well managed, totaling approximately $1.2 billion at year-end 2023, reflecting cash, as well as undrawn capacity under both its revolving credit facility and receivable backed financing program.

Capitalization Building Block (BB) Assessment: Good
Capitalization is solid, given Ryder’s solid earnings capacity and sound risk position. Leverage (debt-to-equity), which is well managed, was a moderate 2.3x (Company calculated) at December 31, 2023, and below the Company’s target range of between 2.5x to 3.0x, but is expected to increase modestly following a recently completed acquisition.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (01 September 2023) https://dbrs.morningstar.com/research/420144/global-methodology-for-rating-non-bank-financial-institutions. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodologies have also been applied:

DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (24 February 2023)
https://dbrs.morningstar.com/research/410196/dbrs-morningstar-global-criteria:-commercial-paper-liquidity-support-for-nonbank-issuers

DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023)
https://dbrs.morningstar.com/research/411694/dbrs-morningstar-global-criteria:-guarantees-and-other-forms-of-support

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and Company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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